The Big Fix

When Democratic and Republican elites seek consensus on how to deal with out of control federal deficits, hold on to your wallets.

By Robert Borosage

The drumbeat about deficits has reached deafening levels. The president warns about out of control spending. Fed Chair Ben Bernanke calls for bringing deficits down. The opinion pages bristle with rants about the US turning into Greece, headed to default. On April 28, the first session of the presidents National Commission on Fiscal Responsibility and Reform convened. The next day, shamelessly, the two co-chairs and the staff director (all committed deficit hawks) were to grace a forum sponsored by the Peterson Foundation, established by Wall Street billionaire Pete Peterson largely to gin up hysteria about Americas long term deficits.

This potion is being served long before its time. Sure, deficits are big and the projections are scary. But the economy is struggling to get out of a big hole. Unemployment is still near 10%. Foreclosures are still rising. Banks arent lending; businesses arent hiring. Deficit spending is critical to what little growth weve seen.

The president and the Congress should be focused on jobs, not deficits. Ironically, when pushed, most of the purveyors of the hysteria agree. Bernanke admits we shouldnt roll back the spending too soon, and is keeping interest rates (for the banks) near zero. David Walker, head of the Peterson Foundation, agrees deficits might be larger in the short run to create jobs and help get the economy going. But these cautions cant be heard amid the clamor about deficits.

The Elites Big Fix

Consider this another example of Naomi Kleins shock doctrine. Not wanting to let the crisis go to waste, an elite consensus is congealing on how to bring the deficits down.

But the fix is in the details. On the revenue side, the favored vehicle is a value added tax (VAT). The VAT is essentially a hidden sales tax, levied at each stage of a products production. Conservatives, who, unlike Dick Cheney, believe deficits matter, accept it because it is regressive, taxing spending, not investment or wealth. Liberals accept it because it is hidden, and could generate a lot of revenue.

The debate has already begun around the VAT. John McCain, in his new guise as conservative partisan, brought a resolution to the Senate denouncing the VAT as a massive tax increase that will cripple families on fixed income. Eighty-five senators voted for the non-binding resolution, including all six members of the Presidents Commission. The administration has since denied that it has any designs on a VAT. But these protestations are simply reflections on how serious the move towards a VAT has become.

On the spending side, cuts in Social Security, Medicare and domestic spending are targeted. The Republican co-chair of the Presidents Commission, former Sen. Alan Simpson, is an infamous scourge of Social Security. The Democratic co-chair Erskine Bowles favored the Clinton effort to privatize it. The deal is foreshadowed by the presidents budget which calls for a three year freeze on domestic discretionary spending, and pay as you go (PAYGO) limits on entitlements, insisting that any increase in entitlements be paid for.

All this is wrapped in gauzy poll designed packaging. A VAT will be sold as a corporate tax reform. Entitlements, were told, must be brought under control as the boomers age. Domestic spending is rife with waste, fraud and abuse.

Stuff and Nonsense

Theres only one problem with this consensus  it is both wrong-headed and dangerous. It ignores how we got into this hole, is blind to the challenges the country faces, and offends the values that made this country great. Heres a little common sense:

1. Ignore False Prophets

As Dean Baker has pointed out, the elite deficit agenda is being peddled by the same folks that profited from the bubble bust economy that drove us over the cliff. Wall Street moguls Pete Peterson and Robert Rubin, leaders of the effort, have preached against deficits for years, arguing that they would eventually lead to recession. They never uttered a word about the housing bubble, the financial casino, the excesses and frauds of Wall Street that actually blew up the economy. They made a lot of money along the way. But their profits dont make them sound prophets.

2. Get the Question Right First

The question isnt how we raise taxes, cut spending and balance the budget. The question is how we return to an economy of full employment with a broad and prosperous middle class. If we create a prosperous and growing economy, wages will go up, revenues will go up, spending on unemployment and misery will go down, and budgets will come into greater balance. Growth is an essential precondition to sound finances. We last had debt of this size relative to the economy at the end of World War II. We invested in the GI Bill and educated a generation. We built the interstate highways. We transferred war industries to private companies. We launched the Marshall Plan, and created markets for products in Europe. And we grew our way out of the debt burdens over time, as we built the middle class society that was Americas pride.

3. Wrong diagnosis, wrong remedy

To understand what remedy is, youve got to have a clear view of what the problems are. The irony of the elite consensus is that in every particular, it ignores the problems we face, and calls for remedies that would make things worse.

Consider:

We dont have an entitlements problem. Social Security is in surplus and, if the economy grows and workers capture a fair share of the productivity they help generate, Social Security will be in surplus as far as the eye can see.

We also dont have a Medicare problem. We have a broken health care system. The source of virtually the entire long term projected deficits comes from soaring health care costs. Were spending 50% more than other industrial countries per capita and getting worse results in terms of good health. The new health care reform does offer some hope of reducing the rate of cost increase. A single payer system  extending Medicare to all - would do far more. But the problem isnt entitlements or greedy geezers, but a broken health care system.. Cutting Medicare and Social Security wont solve that problem.

Consider:

We now suffer Gilded Age inequality. The wealthiest 1% of Americans not only pockets 21% of the national income; they hold more than one-third of the privately held wealth. Plus theyve enjoyed the largest tax cuts over the last decades. IRS figures show that the wealthiest 400 Americans  averaging over $263 million in income in 2006  now pay taxes at a rate (17%) lower than their chauffeurs.

Yet the elite consensus is pushing a VAT that will burden the working and middle class far more than the wealthy. Instead we should be talking about increasing top end tax rates, taxing unearned income at the same rate as earned income (last done when Reagan was president), and cracking down on tax avoidance schemes, levying a speculation tax on short-term financial speculation, reviving the estate tax. And of course, we need to set a price on carbon, a regressive tax no doubt, but one that at least is focused on taxing spending on what we need to reduce.

Consider:

On the spending side, we spend almost as much on the military as the rest of the world combined. We spend more to defend South Korea than the South Koreans do. We police the world and maintain an empire over some 750 bases. And, the military is by far the largest cesspool of waste, fraud and abuse in government. The Defense Departments books are in such disarray that none of the services can be audited, much less pass an audit.

At the same time, we have a debilitating domestic public investment deficit that is rapidly getting worse. As the president has said, we need to build a new foundation for our economy. And that requires investing in education and training so our children get the best education in the world; investing in research and development so we remain on the cutting edge of invention and science; building a 21st-Century infrastructure  from a smart electric grid, to fast trains, cutting edge broadband, and renewable energy. And weve got to rebuild a basic infrastructure  from schools to sewers to bridges  that is aged and literally falling apart. Sure, if the Congress is ready to take on entrenched interests, we can cut a lot of fat out of domestic spending (consider subsidies for Big Oil, Big Agra, and Big Pharma for starters), but in the end we should be spending more, not less on vital domestic investments.

So it makes no sense at all to focus on domestic spending cuts, and leave the military off the table.

Beware Bipartisan Blight

Most Americans want the two parties to work together to solve problems. But when the parties come together to do something big, Americans should be particularly vigilant. Too often, that reflects a strong elite consensus, willing and able to purchase support on both sides of the aisle.

The elite consensus described above already has a lot of momentum and money behind it. Youll see publicists from the American Enterprise Institute on the corporate right joining those from the Center for American Progress, on the center-left. Clintons former Treasury Secretary Robert Rubin joining Nixons former Commerce Secretary Pete Peterson. Editorial boards will echo established authority.

But trust your common sense. The reality is that they have it wrong. If we follow their advice now, were likely to suffer a renewed recession. And their prescriptions will make America more unequal and less secure. Well continue to squander resources across the world, while failing to build a sound foundation for the future at home. Americas broad middle class, the pride of our democracy, will continue its decline. And our politics and our lives will get nastier and more brutish.

Robert L. Borosage is a founder of the Campaign for Americas Future (ourfuture.org), where this appeared April 21 as part of the two-week long Virtual Summit on Fiscal and Economic Responsibility for People Who Did Not Wreck the Economy. See (ourfuture.org/virtualsummit). Email borosage@ourfuture.org.